Foreign Military Sales

GAO reviewed the Pentagon's use of stabilized rates for charging foreign military sales customers for goods and services sold through the Defense Business Operations Fund. Members of Congress have voiced concern that stabilized rates may not represent the full cost of the goods and services being sold, as required under the law. GAO found that the stabilized rate generally included the cost elements necessary to recover the full cost. GAO did, however, identify two cost factors--pension and postretirement health benefits for civilian personnel working on foreign military sales cases--that were not included in the stabilized rates. GAO estimates that foreign military sales customers were undercharged by more than $40 million during fiscal years 1992-96 and they will be undercharged by millions more in fiscal year 1997. The Defense Department plans to revise its policy to require that all retirement benefits for civilian workers be reflected in the prices charged foreign military sales customers.

GAO noted that: (1) DOD's stabilized rate generally is designed to recover full costs from DOD and FMS customers over the long term; (2) the concept of applying the stabilized rate is a viable method to recover the cost of goods and services from these customers; (3) GAO's analysis of cost elements in the stabilized rates showed that generally, the stabilized rate included the cost elements necessary to recover full cost; (4) however, GAO did identify two cost elements--pension and postretirement health benefits--related to retirement benefit costs of civilian personnel working on FMS cases, that were not included in the stabilized rates; (5) GAO estimates that Working Capital Fund (WCF) supply activities undercharged FMS customers at least $40.5 million during fiscal years (FY) 1992 through 1996 and will undercharge millions more in FY 1997; (5) GAO discussed this matter with DOD officials and they agreed that not all civilian retirement benefit labor costs were included in the rates that activities were charging FMS customers; and (6) they now plan to revise their policy to require that this cost be included in the prices charged FMS customers.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Team: Phone: